What Is Forex Trading A Primer

Global economic markets have evolved considerably over the past few decades

, mainly on account of free flow of capital and the underlying trading mechanism which enables currencies of one country to be traded against another. This system of buying and selling of currencies of two or more countries against each other is called forex trading.

In the initial stages, forex trading involved physical flow of money to ensure that trading happened. With the advent of internet and other networking infrastructure, it has become very easy to connect seamlessly across different countries and their economies across different time zones to ensure that forex trading happens more easily. Typical forex trading happens these days through e-enabled solutions by simply making an order over computer or phone.

The genesis of forex trading is on account of purchase and sale of goods between countries, wherein the buyer has to pay in the currency of the seller. In such cases, the buyer would place a request for purchase of a foreign currency through a forex dealer or broker. The broker would receive prices from various banks over private dedicated lines. This is called the interbank market. The interbank market is merely a reference of the exchange rate prevalent between different currencies at any point of time. Once the broker gets a desired rate, the same is flashed back to the buyer for confirmation and the deal is concluded.

Apart from the physical demand and supply requirement of cross currencies, forex trading today is also based on speculations. This is done by forex brokers and authorized dealers (mainly banks) as well as retail companies and individuals. It involves taking a speculative stand on the relative appreciation or depreciation of one currency against the other. It does not involve physical purchase or sale of cross currencies, since a speculator would take a buy and sell leg on the same cross currency to square off the deal on similar delivery dates.

by: Chris Cornell

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